In recent years executive pay has exploded, while pay for the rest of society has barely kept up with inflation. For example in 1998 chief executives of FTSE-100 companies were paid approximately 48 times the national average wage. By 2010 they were being paid 162 times the average wage.
From 2010 to 2011, when the rest of the country was being forced to undergo ‘austerity’ with average wage increases of 2.5%, FTSE-100 chief executives gave themselves an average pay rise of 49%. In 2012, boardroom pay went up 12% against a national average of 1.4%. In 2013 their pay went up 14% against a national average of 0.7%. And last year their pay went up another 10%. Average CEO salary is now £5.5m, which means they are paid over 200 times the average wage of £27,000/year. (Currently the UK has the second worst pay differential in the Western world, after the USA.)
How is this allowed to happen? Simply because the people at the top are in control of setting their own pay, as well as the pay of their workers. Inevitably when annual pay increases are being agreed, the bosses pay their workers as LITTLE as they can get away with, while they pay themselves as MUCH as they can get away with. This constant DOWNWARD pressure on workers pay and UPWARD pressure on exec pay leads to the ever-increasing gulf we’ve seen above.
Now Free Market theory would suggest that bosses would be in competition with each other for their pay as well, which would keep increases down, but the reality is they know full well that if they allow their rivals’ pay to go up, that’s good bargaining to get their own pay to go up too. So that’s what happens. In addition, although for public companies shareholders have to approve executive pay, most shares are held by pension funds, life insurance companies etc, so the voting on pay isn’t done by the beneficial owners (the pensioners etc) but by the Trustees. Who are the Trustees? City types, probably directors themselves, all friends with each other and part of the same elite club. So inevitably pay rises are waved through.
When questioned about their excessive pay levels these people inevitably quote the mantra ‘market rate’ to justify their pay, on the grounds they should get it because everyone else is. However given that this particular market is being fixed – by them – this mantra is simply an excuse for organized theft, for which the rest of us have to pay.
So what can be done?
One suggestion is to introduce a legally binding maximum wage, in the same way we have a legally binding minimum wage. Critics argue that top execs would simply move abroad, but the John Lewis partnership already run such a system, where the chief exec can’t earn more than 75 times the average non-management salary – this doesn’t seem to have done them any harm. That scheme limits top pay to around £1m per year, which is surely enough for anyone? If this system were introduced we would need to link top pay to national averages rather than the average at the particular company to stop execs manipulating salaries (for example by outsourcing) in order to pay themselves more. The legislation would also need to include all bonuses, share schemes and other payments in kind to stop execs getting round the system by paying themselves more in other ways.